Thursday, October 28, 2010

Bond Yields

Irish bond yields have been creeping up over the last few days and are now are highs for the current crisis. Here is a 12-month graph of the yields on Irish 10-year government bonds taken from Bloomberg.

The short-lived surge in May was due to the Greek debt crisis. Yields dropped down below 5% once that abated but over the last few months have risen to beyond the May levels and broke through 7% this morning.

We see this in the graph on the right which shows the yields for this morning. From the opening the yields rose (the price fell) and hit 7.06% and have now dropped back to 6.94%.

There has been little domestic news to suggest a deterioration in the Irish economy that bond markets are responding to. There was a minor flap about the redemption of nearly €9 billion of Anglo Irish bonds that briefly caused a stir on the newswires but it seems to have been much ado about nothing. You can follow the story and the chief protagonists of it on here. This is not the cause of the surge in Irish bond yields though other difficulties with Anglo may be involved.

Some have attributed the increase to uncertainty in the ability of the minority Portuguese government to get a budget passed and that this is generating contagion to other ‘periphery’ countries. You can track Portuguese 10-year bond yields here. After rising in early trades they have fallen below their opening levels and are now (12pm) at about 5.94%.

All in all it is hard to pinpoint the drivers of the current swings in bond yields. The people to suffer this morning are holders of Irish bonds, as the price of the asset they are holding has declined. Ireland does not have to pay any additional interest on the bonds we have issued but if yields stay at this level into the new year we will be faced with a very high cost for new debt.